China Central Bank Official Says Bankruptcy May Benefit the Country

  • PBOC’s Xu Zhong sees need to rein in local government debt
  • Finance Ministry pledged to break expectations of bailouts

A man poses for a photograph in front of the People's Bank of China headquarters in Beijing. 

Photographer: Qilai Shen/Bloomberg

A Chinese central bank official said China should allow local governments to go bankrupt to help rein in regional authorities’ excessive borrowing.

A case like the bankruptcy of Detroit would convince investors that the central government is really determined to dispel beliefs of an implicit guarantee for regional authorities, Xu Zhong, head of research bureau at the People’s Bank of China, wrote in an article in the China Business News Monday. Just a couple of days ago, China’s finance ministry pledged to break the “illusion” that Beijing would bail out local governments’ hidden debt.

Their calls for limiting local borrowings are in line with central government’s financial policy for 2018. President Xi Jinping said earlier this month that a priority for next year is to "effectively" control leverage and prevent major risks. China’s central bank governor Zhou Xiaochuan in October urged to guard against local government financing vehicles and other means being used "to disguise debts" and argued for fiscal reforms.

Concerns among investors about a lack of support for local funding units have led to a slump in the issuance of local governments’ debts. Local government financing vehicles have sold 1.7 trillion yuan ($259 billion) worth of bonds in onshore and offshore market this year, a 23 percent drop from 2016’s level, according to data compiled by Bloomberg. Fitch Ratings said in September the first bond defaults by Chinese LGFV are becoming more likely.

Vice Finance Minister Zhu Guangyao said on Saturday that addressing “hidden debts" of local governments and state-owned companies’ debts are key to prevention of systemic financial risks, the China Securities Journal reported.

— With assistance by Judy Chen

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